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With secular sector trends such as cord cutting and rapidly rising programming expenses now digested, all eyes are on the repercussions of Title II reversal on the broadband ecosystem in what is shaping up to be a highly political year. With this in mind, Kagan, a media research group within S&P Global Market Intelligence, inventoried, in no particular order, what we believe will be the top developments to watch for in 2018.
In January 2017, we anticipated a reshuffling of the Federal Communications Commission by President Donald Trump would be the death knell of rules regulating broadband as a utility. We also suggested continued softness in sports viewership would lead to an acceleration in multichannel customer losses. Subscriber data as of third quarter 2017 pointed to losses topping the 3.5 million mark for the year versus 1.8 million in 2016.
As expected, cable advertising revenues stayed relatively healthy despite political dollar withdrawals, and the subscription-package formula showed resilience as it transitions online. But our calls for aggressive TV Everywhere monetization and individual multichannel pricing plans mirroring the wireless practice have yet to materialize.
*Broadband classification reversal to boost M&A, cable system valuations.
The appeal of owning a (highly profitable) data delivery network has been magnified by the FCC's December 2017 vote to reverse Title II, which removed the threats of rate regulations that hung like a sword of Damocles over the sector. This could bring foreign investors back to U.S. shores (both SoftBank Group Corp. and Altice USA Inc. have been rumored to be interested in Charter Communications Inc.), lead to large vertical deals and maintain the flow of private-equity money into the sector, keeping the M&A momentum going after the rebound of 2017. Reform of the U.S. tax code, which lowers the corporate tax rate to 21%, does not hurt. Valuation metrics could soar.
* Title II reversal sets the stage for data caps, throttling zones, and zero-rating strategies.
The multiplication, and popularity, of over-the-top video and virtual service provider products, including Walt Disney Co.'s upcoming ESPN streaming offering, increasingly pose the question of network and bandwidth management, notably during peak streaming hours. A widespread implementation of data caps and/or throttling beyond specific consumption thresholds, a common practice among wireless carriers, likely is not too far off following the FCC's Title II decision. Not only would the move result in incremental broadband revenue, but it would provide a form of insulation for VSP offerings in the case of ISPs offering such products, e.g., AT&T Inc.'s DIRECTV NOW and Comcast Corp.'s XFINITY Instant TV, when combined with a zero-rating strategy.
* Walt Disney/21st Century Fox deal to accentuate programming inflationary pressure, legacy multichannel sub decline.
Among other things, the proposed Walt Disney/21st Century Fox Inc. merger spells an unprecedented concentration of ownership of sports content — TV's most popular programming — suggesting unparalleled leverage during carriage negotiations. Look for sports programming costs to shoot up, magnifying the programming expenses/legacy multichannel subscriber decline vicious cycle identified as follows: higher content costs compel multichannel video programming distributors to hike rates, weighing on multichannel affordability and resulting in cord cutting. As the multichannel subscriber base erodes, programmers compensate through higher carriage fees and the mechanics of the feedback loop go full circle.
* MSOs to dip into original content waters.
When "Peak TV" keeps peaking, the tech titans pour money into programming and the only way to differentiate your video offering is original content, the time appears ripe for MSOs to take the plunge. Charter's onboarding of NBCUniversal Media LLC and Chernin Group TV executive, and programming veteran, Katherine Pope is a milestone in that direction. The acquisition of content producers — perhaps smaller-to-midsize Hollywood studios? — offers another path toward content ownership. Comcast led the way nearly a decade ago when it moved to acquire NBCU.
* Congress to legislate on net neutrality.
With consumer advocacy groups and Silicon Valley giants gearing up to mount legal challenges to the FCC's decision to repeal Title II and ISPs calling on lawmakers to take up the matter, the stars appear to be aligning for Congress to legislate on net neutrality rules. On January 8, a bill pushed by Sen. Ed Markey, D-Mass., received the support of a 30th co-sponsor, securing a vote on the Senate floor. In a blog post on December 14, 2017, Comcast Senior Executive Vice President and Chief Diversity Officer David Cohen wrote: "[W]e really must have bipartisan congressional legislation to permanently preserve and solidify net neutrality protections for consumers and to provide ongoing certainty to ISPs and edge providers alike.
* VSP/direct-to-consumer universe to tighten grip on subscriber gains, further upsetting traditional delivery while softening multichannel erosion.
The popularity of IP-based services such as DISH Network Corp.'s VSP Sling TV, AT&T's DIRECTV NOW and Alphabet Inc.'s YouTube TV is weighing on legacy multichannel, precipitating traditional customer defections. But it also helps sustain the overall U.S. multichannel penetration rate in the age of Netflix Inc., Amazon.com Inc. Prime Video and binge watching. Those dynamics, magnified by the availability of direct-to-consumer products such as CBS Corp.'s CBS All Access, Time Warner Inc.'s HBO NOW and the upcoming ESPN streaming offering, are expected to intensify in 2018.*
* Elections, Winter Olympics and soccer's biggest stage to combine for record advertising receipts.
With advertisers insisting on identifying and understanding target audiences in an increasingly digital world, cable's first-party data gives the sector an edge in the legacy TV ecosystem. The valuation proposition again is expected to be extensively leveraged by political campaigns leading up to the 2018 midterm elections, which are shaping up to be hotly contested, and thus, likely to result in unprecedented advertising spending given the current political climate. Two major international sporting events, the Winter Olympics in Pyeongchang, South Korea, February 9-25 and the FIFA World Cup in Russia, June 14-July 15, should be icing on the cake, although geopolitical tensions could be a fly in the ointment.
* Top MSOs to ramp up wireless strategy as smartphone viewing reaches new heights.
With the world's most ubiquitous appendage increasingly monopolizing attention — the average U.S. consumer spends more than three hours per day on mobile devices according to a January 9 article from The Wall Street Journal citing eMarketer research — there is a sense of urgency for MSOs to bring their Wi-Fi investments and mobile virtual network operator agreements to scale. The strategy could be supplemented by wireless acquisitions and complemented by seamless mobile VSP offerings under a zero-rating model.
* Maturing wireline broadband market to result in market share gains for MSOs.
For broadband providers, the days of the Wild West and vast territories to conquer are over. Nearly 80% of U.S. homes now subscribe to high-speed data. As saturation sets in, poaching becomes the only path to subscriber growth. Look for MSOs to flex their DOCSIS muscle to attract DSL customers in overlap areas. Telcos have the fiber card up their sleeve, however, despite a late, relatively slow transition from copper, and 5G technology looms.